What to Expect From the U.S. Jobs Report
(Bloomberg Opinion) -- The U.S. jobs report for October is more likely to satisfy those looking for good economic news than those who also hope the data will settle volatile financial markets. Indeed, as central banks remove the noise-canceling headphones they have provided for investors in recent years, the numbers released Friday could reinforce the unusual up-and-down moves in stocks during the last few weeks.
Look for the data to confirm three elements that underpin the robustness of the U.S. labor market: continued solid job creation (after netting out the competing effects of Hurricanes Florence and Michael), a pace of employment expansion that still exceeds the historical levels for so late in an economic cycle, and a pickup in wage growth (with a year-on-year increase above 3 percent, compared with 2.8 percent in September). Meanwhile, the unemployment rate will remain at a historically low level, while the gap between the number of registered unemployed and reported job openings will widen further.
This is good news for the U.S. economy. It points to continued favorable prospects for household income, and therefore consumption, because the economy is also being supported by higher business investment and fiscal stimulus. It would be even better news if Friday’s report also included an increase in labor-force participation (currently at 62.7 percent, with the employment-to-population rate at 60.4 percent) as discouraged workers are attracted back by ample vacancies and higher wages that are not offset by skill mismatches.
You would think that strengthening economic fundamentals would provide a stronger foundation for risk assets, helping to counter the recent higher volatility in U.S. stocks. After all, average monthly job creation has been running above 200,000 in 2018 and the effects of a solid job picture are widening, reinforcing prospects for higher and more inclusive growth. Although this is likely to be the case over the longer term, it is unlikely to be a material development in the weeks ahead for two main reasons.
First, by confirming that the Federal Reserve has reached, or is very close to attaining, the employment and inflation goals in its dual mandate, the October jobs report is likely to reinforce prior central bank guidance that interest rates will increase by more than what is currently priced in by markets. It would also bolster the inclination among the current top leadership not to go back to the practice under Chairs Janet Yellen and Ben Bernanke of Fed officials making soothing remarks to settle volatile markets.
Second, America’s continued labor market strength comes amid weakening economic momentum elsewhere, and not just in the advanced world. This trend, which was confirmed this week by growth data out of Europe as well as a gauge of China’s manufacturing activity, will increase headwinds for highly indebted countries and companies. It is part of an unusual economic divergence that is already significant among the advanced economies, and is getting wider.
A further parting of ways would place pressure on several market interactions. Already, some notable relationships, such as a very large yield differential between the U.S. and Germany of more than 270 basis points for 10-year government bonds and the 20 percentage-point difference between the S&P 500 and the broad EEM emerging market stocks index, are at historically stretched levels. Growing divergence would also continue to support the dollar, which is currently trading at its most appreciated level this year, raising another set of issues for emerging markets and some corporates in both advanced and emerging economies.
The bottom line is simple. Expect Friday’s report to confirm the continued solid performance of the U.S. economy, as well as its growing lead over most other advanced countries. But do not expect the economic phenomenon the data highlights to act, at least as yet, as a circuit breaker in countering significant up-and-down stock market volatility.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. His books include “The Only Game in Town” and “When Markets Collide.”
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